[1]U.S. stocks extended their rally and hit new record highs during Monday trading hours on favorable news in the crude oil markets and fluctuations in the U.S. dollar. The S&P 500 Index closed at its highest level ever on Monday and reached an all-time high of 2,406 in intraday trading yesterday.

Despite the apparent risk-on environment, the yield of the 10-year Treasury has declined over the past week to 2.33% as of Tuesday. The over 2% jump in crude oil prices earlier this week was largely attributable to the announcement that Saudi Arabia and Russia, the world’s top two oil producers, will extend production cuts into March of 2018. A recent report from the International Energy Agency shows an expectation for further tightening in the global oil market and support for prices, specifically via an acceleration in demand from China.

China has announced it intends to lead an unprecedented globalization plan called the Belt and Road Initiative to promote free, multilateral trade and help address global economic challenges. President Xi Jinping pledged 540 billion yuan, or $78 billion, in financing to the Silk Road Fund and new lending to participating nations. Alongside the renewed initiative, the trade relationship between the U.S. and its largest trading partner is being reshaped. A 10-point trade package was signed into agreement between the U.S. and China that addresses specific goods transactions and will open China’s market to American financial services companies in an effort to increase trade fairness. China is our largest goods trading partner with $578.6 billion in “two-way” trade last year, according to the Office of the United States Trade Representative; China was also the United States’ third largest export market in 2016.

Emmanuel Macron was inaugurated into office on Sunday as the youngest person to be elected as President of France since Napoleon. Markets have shown continued support to Macron’s plans for France and his views on globalization. According to data from EPFR, record inflows of $6.1 billion went toward European equity funds in the days following his election win. In his first day of presidency, Macron spoke in Berlin with German Chancellor Angela Merkel on reform of the European Union, including possible changes to the EU treaty itself that may result in more amicable relations between member states. The U.K. leaving the EU may have been a wake-up call for European decision makers, or maybe they jumped ship a little too early…

Our team believes sizable risks have been moved off the table, especially abroad as the French elections have concluded and China’s growth policies shift into high gear. European political risk remains modest as German general elections take place in September; however, it seems Merkel’s centrist-leaning party, the CDU, has already won key state-level elections. We continue to believe U.S. stock valuations are elevated, despite notable earnings growth this past quarter, and see a growing risk of correction over the near-term. Even as positive trends emerge, we believe a Chinese slowdown, a rough U.K.-EU exit process, and U.S. fiscal policy disappointment will be crucial to watch out for.

==Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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